Latest market data

Stock search

Chalk this one up as a big win for franchisees and a big loss for
franchisors.

California's State Assembly passed a bill on Thursday that expands
franchisee rights, making it significantly more difficult for
a franchisor to terminate franchise agreements. The bill
passed by a vote of 41 to 27 and has returned to the state
Senate for final approval.

The SB 610 bill requires franchisors to provide evidence of a
"substantial and material breach on the part of the franchisee of
a lawful requirement of the franchise agreement" prior to
terminating a franchisee. It additionally prohibits franchise
agreements that bar a franchisee from selling or transferring a
franchise.

Franchisee groups such as the American Association of Franchisees
and Dealers (AAFD), the Coalition of Franchise Associations (CFA)
and the Asian American Hotel Owners Association (AAHOA) argue
that the bill is necessary to protect franchisees. Franchisees
hope the bill has the power to cut "churning," a ploy in which
franchisors terminate franchise agreements and resell locations
to cash in on fresh franchise fees.

"Modern franchise relationships are most always governed by
one-sided ‘take it or leave it’ adhesion contracts that elicit
substantial monetary investment from franchise owners, but
severely limit a franchisee’s rights in the franchise
relationship," the AAFD said in a statement in June. "SB-610, as amended in
2014, takes a small but important step in recognizing and
protecting franchisee rights."

The bill also received some somewhat surprising support from
labor activists. The Service Employees International Union
(SEIU), a labor union most recently noted for its financial
backing of fast food strikes across the U.S., launched the
website Franchisee Fairness and released a number
of radio ads supporting SB 610.

Outside of its efforts with SB 610, SEIU has also supported
measures that limit or draw attention to the limitations of
franchisees' independence. In July, the union supported The
National Labor Relations Board's (NLRB) designation of McDonald's
as a joint employer for workers at franchised restaurants, a
decision opposed by both franchisors and many franchisees.

In the case of SB 610, the SEIU argues that if franchisees are
given increased freedom, both franchisees and employees will
benefit.

"With greater protections from unfair corporate practices and
costs, these small businesses will have the ability to treat
their workers right," states the SEIU-backed Franchisee Fairness
website.

While employees and franchisees may support the bill, it comes as
a blow for franchisors with locations in California. Franchisors
and the International Franchise Association (IFA) argue that the
new bill makes it more difficult for franchises to protect their
brand reputation by terminating franchisees when the relationship
goes sour. Opponents to the bill claim that it could scare
potential franchisees from expanding in California and rack up
litigation costs for franchisors and franchisees.

The franchisees argue that South Asian franchisees have been
forced out of the system as a part of a profit scheme by
corporate 7-Eleven offices. Meanwhile, 7-Eleven attests that
certain franchisees needed to be terminated due to violations of
their franchise agreements that threatened the company's profits
and the 7-Eleven brand.

Had SB 610 been in place prior to 7-Eleven's termination of
franchisees involved in the lawsuit, these store owners may still
be running shops across California. Or, the franchisees may have
been terminated, with a great deal more effort on 7-Eleven's
part.

In any case, under SB 610 Californian franchisees will rest a
little easier, knowing that their rights as franchisees just got
a little stronger.